These companies have most to lose in Apple’s strategic ‘insourcing’ drive — ranked by revenues

Jim Edwards

Updated 17 April 2017 at 9:22 am

REUTERS/Bobby Yip

A worker at Foxconn.

Shares in Dialog Semiconductor stock plunged last week after a note from Karsten Iltgen, an analyst at Bankhaus Lampe, which said, “There is strong evidence that Apple is developing its own power-management integrated circuits and intends to replace the chip made by Dialog at least in part.” The stock dropped 35% at one point. Dialog is based in Reading, England.

A number of other companies’ stocks declined too, as investors began to realise that Apple has the ability to “insource” aspects of its manufacturing previously done elsewhere.

It’s a familiar story. Apple has dramatically altered the fortunes of several of its suppliers recently:

Dialog Semiconductor: Apple has hired about 80 engineers to do the work normally done by Dialog, according to Iltgen.
Toshiba: Apple is considering buying a 20% stake in Toshiba’s semiconductor business, according to Reuters.
Imagination Technologies: Earlier this month, stock in Hertfordshire’s Imagination Technologies fell off a cliff when Apple decided to ditch the chipmaker and make its own GPU chips in-house. Apple also hired a few Imagination execs.
Qualcomm: Apple sued Qualcomm, accusing it of withholding $1 billion in rebates, causing Qualcomm’s stock to tumble in January.
InvenSense: In February, shares of InvenSense lost 11% of their value in a single day over a rumour that it might lose a contract to supply Apple with motion-tracking sensors. Apple is about 40% of InvenSense’s revenue.
GT Advanced: And few Apple observers are likely to forget the time in 2014 when Apple drove its sapphire glass screen provider into bankruptcy. The company, GT Advanced, had contracted with Apple to make a new type of screen for the iPhone. Apple also loaned the company a lot of money. GT alleged that the contract agreement was so harsh — it included a one-way $50 million fine if there was any breach of confidentiality — that it was impossible for the company to deliver on Apple’s demands.

REUTERS/Stringer

Employees in Foxconn uniforms during a lunch break in Shenzhen.

From Apple’s point of view, it is business as usual. The company, like any other, has every right to seek the best terms available. The team of analysts that includes Katy Huberty at Morgan Stanley believe Apple is currently on a cost-cutting drive. The company wants to extract better terms from its suppliers, these analysts say, and that may mean margins at Apple’s suppliers are threatened.

“So where will Apple squeeze component costs to mitigate higher BOM [bill of materials] costs?” the Morgan Stanley team asks.

The question was answered by RBC analyst Amit Daryanani in a note to clients last year:

“We think Apple has been pushing for price discounts from multiple suppliers as a way to dampen foreign-exchange headwinds Apple is facing on their own P&L.”

Apple has also reduced its reliance on one or two main suppliers for some parts, spreading them across three or four companies — making it easier for Apple to play them against each other.

Apple also has a strategy of customising its products as much as possible. Moving some manufacturing in-house, or “insourcing,” would give Apple more control, and perhaps more flexibility. (Apple did not respond to a message requesting comment.)

There are two unique aspects to the process:

Apple is the largest (by market cap) and most profitable company on the planet. Its contracts can be huge, easily running into billions of dollars.
And Apple is uniquely secretive about its dealings with suppliers. Apple demands complete control — and complete silence — from its partners and vendors. It is very unusual when the conditions of those agreements burst into the open.

The public spats with Imagination et al. give us a rare glimpse into the dark, quiet, and massive archipelago of tech companies that supplies Apple with parts that go into its iPhones and computers.

One thing is clear: Companies that become Apple vendors are walking on a high-wire. Because the iPhone is the single biggest-selling phone on Earth, there is no such thing as a “small” iPhone contract. Companies that agree to supply Apple with parts often find that a huge, often dominant, percentage of their revenues end up coming from a single, Cupertino-based client. That can turn small companies into huge manufacturing operations. But it also breaks them if relations go bad. Some analysts believe that Imagination will meet the same fate as GT, for instance, when Apple pulls all its business from the British firm.

Here is a look at the major companies who are suppliers of Apple technology. Our data comes from a wide array of analyst notes and Factset. It is not an exhaustive list — there are hundreds of companies supplying Apple with parts. (We have excluded Samsung, LG and its various affiliates, and Sony. Although these companies are major suppliers to Apple they are so big that they are not dependent on Apple.)

Our list includes Cirrus Logic, Imagination Technologies, Qualcomm, TTM Technologies, Knowles, Jabil Circuit Inc., Multi-Fineline Electronix Inc., Broadcom, TMSC, Hon Hai (Foxconn), Wistron, Pegatron, AAC, Alps, Catcher, Largan, TPK, TT Zhen Ding, Western Digital, Texas Instruments, Skyworks, Qorvo, Dialog Semiconductor, Flexium, Kinsus, Chipbond, Japan Display, TPK, Murata Manufacturing, GIS, and Goertek.

We have ranked them by the size of their contracts with Apple, in dollars.↓↓↓

KNOWLES: Dependent on Apple for 11% of its $440 million in annual revenue, or $48.4 million in sales.

Knowles makes micro-electro-mechanical systems (MEMS) microphones and audio equipment. At least two of every four microphones in the iPhone 7 Plus were Knowles products, according to a teardown by System Plus Consulting.

The company says that $48.4 million, or 11%, of it $440 million in annual revenue comes from Apple.

IMAGINATION TECHNOLOGIES: Dependent on Apple for about half its annual revenue of $148 million, or roughly $74 million in sales.

Imagination had sales of £120 million ($149.4 million) in the year leading up to April 2016. But on the day that Apple announced it would create its own GPUs its market value dropped 75%. Imagination employs 1,700 people. Apple owns a 9.5% stake in the company.

Apple had held acquisition talks with Imagination last year but didn’t go through with the deal. Instead, it hired several of Imagination’s key execs, including COO John Metcalfe, who became a senior director at Apple since last July. In 2015, Apple hired vp/hardware engineering to be a director in the UK.

KINSUS: Dependent on Apple for 30-35% of $759 million in annual revenues, or $266 million in sales.

Kinsus supplied substrates — discs or wafers onto which electronics are printed — for Apple Watch and Apple Watch 2.

FLEXIUM: Dependent on Apple for 60-70% of $596 million in total revenues, or $417 million in sales.

Flexium makes flexible printed circuit boards. It is reportedly developing products on the assumption that iPhone 8 will have an OLED screen. It is one of two companies — the other being Zhen Ding — able to resist Apple’s price cuts in its category.

INVENSENSE: Depends on Apple for 30% to 58% of its $418 million in total revenues, or at least $128 million in sales.

InvenSense makes motion sensors and accelerometers for the iPhone. Its business has been somewhat volatile. It was recently acquired by TDK.

The company’s products were recently designed out of the Samsung Galaxy S7 even though InvenSense had made parts for Samsung’s previous flagship phones.

MULTI-FINELINE ELECTRONIX: Dependent on Apple for up to 75% of $531 million in annual revenues, or $398 million in sales.

MFLX makes flexible printed circuits, mostly for iPhone but also for iPad. It was acquired by DSBJ in 2016 and no longer trades publicly.

In its last fiscal year of public operation, 2015, it had revenues of $636 million, of which up to 80% ($509 million) may have derived from serving Apple. In 2016, Longbow Research estimates its Apple sales were $398 million.

LARGAN: Dependent on Apple for 30% of $1.6 in total annual revenue, or $477 million in sales.

Largan, which makes camera lenses for iPhone 7, holds its conference calls and publishes its financial reports in Mandarin, lowering its visibility to people in the West. The company is thought to have benefitted from strong sales of iPhone 7. It also appears to have successfully pursued a settlement on an alleged patent infringement with Samsung.

TTM TECHNOLOGIES: Dependent on Apple for 20% of revenues, or $500 million of its $2.5 billion in total sales.

TTM supplies 23% of HDI printed circuit boards in iPhone 8, according to Morgan Stanley. Analysts at RBC estimate that 20% of its $2.5 billion in annual revenues come from Apple, or about $500 million.

AMPHENOL: Dependent on Apple for 10% of $6.3 billion in annual revenues, or $630 million in sales.

There is money in hinges. Amphenol makes metal injection molding hinges for MacBook, which is a process that makes them as thin as possible. Amphenol claims to make the thinnest hinges in the world. The design helps Apple save space and lets the company make its laptops as thin as possible.

ALPS ELECTRIC CO: Dependent on Apple for 10% of its $6.9 billion in annual revenue, or $690 million in sales.

Tokyo-based Alps makes camera actuators and switches, and is responsible for the optical image stabiliser in the iPhone 7’s dual camera system. It makes the mechanism that ensures your photos look sharp and crisp, and cuts down the blur, in other words.

Managing director Seishi Kai gave a fascinating interview to the Nikkei Asian Review in 2016 in which he talked about the difficulty of supplying certain large smartphone clients:

“North America now accounts for 70% of our smartphone customer base. So of course production decreases on that front are going to have a big impact. But it’s dangerous to try to even out production because that only adds to inventories. To spread the risk, we need to broaden our customer base further.

“… I think smartphones will become a commodity, difficult to tell one from another in terms of functionality, like what happened to PCs. The turning point may come around 2018. Preparing for what comes after that is our biggest challenge.

“The assumption that the smartphone market will just keep growing needs to be re-examined. If by chance orders come in higher than expected, you can respond at that time.”

QORVO: Dependent on Apple for 32% of $2.6 billion in annual revenue, or $832 million in sales.

Qorvo is on the list of companies that analysts think will not be immediately affected by Apple’s insourcing drive. The company makes mobile radio frequency solutions for advanced wireless devices, wired and wireless networks.

DIALOG SEMICONDUCTOR: Dependent on Apple for 74% of its $1.2 billion in annual revenues, or $864 million in sales.

Dialog’s stock was hurt recently after one analyst noted that Apple had begun hiring engineers that do what Dialog already does — suggesting that Apple might be preparing to reduce its reliance on Dialog by using its in-house people. However, other analysts weighed in and said that theory was over-cooked. Here is a quote from the team at Barclays which was typical:

“We acknowledge Apple’s continued hiring of engineers, in power management and elsewhere, but an additional 80 engineers hired in this area pales in comparison to the over 1,300 engineers Dialog employed at the end of last year, the vast majority of which are dedicated to power management and in particular Apple; Apple of course require power management engineers in order to integrate circuitry, but double digits is insufficient to develop a high performing system from scratch. We continue to see Dialog’s position as very strong, its parts tightly integrated with those of Apple and with IP protection, and for this relationship to continue to drive strong growth for the foreseeable future. With 74% of 2016 revenue coming from Apple, we understand investors’ fears around customer concentration, but we do not think Dialog faces the same fate as Imagination.”

CIRRUS LOGIC: Derives 85% of its $1.2 billion in revenues, or $960 million in sales, from Apple.

CEO Jason Rhode never dares mention Apple by name, according to the Financial Times. He begins every earnings call with these words: “While we understand there is intense interest related to our largest customer, in accordance with our policy, we do not discuss specifics about our business relationship.” The remaining 15% of its business comes from Samsung.

The Texas-based audio chipmaker had sales of $1.2 billion in 2016, about $960 million of which came from Apple.

GOERTEK: Dependent on Apple for 40% of $2.8 billion in sales, or $1.12 billion in sales.

Goertek makes micro-electromechanical systems microphones in iPhone 7. The company has increased and solidified its position inside Apple’s iPhones since 2011, according to CTimes:

Goertek MEMS microphone units grew by an impressive 104 percent CAGR between 2011 and 2015, thanks in large part to its design wins in Apple, the IHS Markit analysis shows. Apple accounts for approximately 70 percent (in units) of Goertek’s MEMS microphone business in 2015. Goertek entered in large volume in the iPhone in 2014 and has since continued to increase its share; this has had the impact of reducing the share of AAC and Knowles in subsequent years.

AAC TECHNOLOGIES: Dependent on Apple for 40-55% of its total $ 2.2 billion in annual revenue, or $1.21 billion in sales.

AAC supplies miniature acoustic such as receivers, speakers and microphones for the iPhone, iPad and Apple Watch. It also produces, haptic components and metal casings. Analysts are bullish on AAC after hearing from suppliers that Apple has ordered up 100 million units for iPhone 8.

CATCHER: Dependent on Apple for 50-60% of $2.6 billion in total annual revenue, or at least $1.3 billion in sales.

Catcher makes the chassis and casings for MacBooks, iPads and iPhone. It is one of the Apple suppliers that has committed to using renewable energy to make Apple’s products. There are mixed reports about Catcher’s duties on iPhone 8. One report suggests the company is making the aluminium and glass body for iPhone 8 but another says Catcher will be on the aluminium body for the smaller iPhone 7s models.

SKYWORKS SOLUTIONS: Up to 44% of $3.3 billion in annual revenues, or $1.45 billion in sales.

Skyworks makes analog semiconductors, the wireless chips that keep devices connected to the internet.

Pacific Crest Securities believes that Skyworks will be spared Apple’s insourcing threat although earlier this year the company was downgraded by Goldman Sachs on the belief that it might lose business to Broadcom.

About 40% of its revenue comes from Apple, down from 44%, an estimate from a year earlier.

TPK: Dependent on Apple for 50% of its $2.9 billion in annual revenues, or $1.45 billion in sales.

TPK is Apple’s touch panel supplier, such as the force touch tech for iPhone. It makes “touch on lens” technology, which reduces the number of detection and display layers in a touchscreen device, thus making the device thinner.

The company made the new Touch Bar for MacBook but struggled with screens for Apple Watch, according to Apple Insider.

TPK CEO Michael Chung told Nikkei Asian Review that sales decline so much when the company was working on iPhone 6s that he regarded 2016 as a “dark tunnel”.

ZHEN DING TECHNOLOGY: Dependent on Apple for 55% of $2.7 billion in annual revenue, or $1.5 billion in sales.

Zhen Ding is Taiwan’s largest supplier of flexible printed circuit boards. It was rumoured to be working with Apple on new health-tracking products. Its role in production for iPhone 8 is unclear.

Zhen Ding is also one of the companies responsible for dragging Apple’s name into the mud in terms of worker exploitation. The Huffington Post reported in 2014:

The work is so exhausting that some of the estimated 15,000 workers choose to sleep through their lunch breaks instead of eating, the report states.

… After viewing the report, an Apple spokesman told The Huffington Post that the company was already aware of problems at the factory due to previous annual audits. Apple put Zhen Ding on probation earlier this year after discovering it had doctored payroll records to hide excessive overtime.

WESTERN DIGITAL CORP: Dependent on Apple for 14% of its $14.5 billion in revenues, or $1.8 billion in sales.

Western Digital Corp is in the memory business: It makes hard disk drives and external solid-state drives. A big chunk of its business came from a $19 billion acquisition of SanDisk in 2015.

QUALCOMM: About $1.9 billion, or 8% of its $23.5 billion in revenues, come from Apple.

Qualcomm makes wireless modems iPhone and iPad, and Apple uses a lot of patents held by Qualcomm.

Apple sued Qualcomm alleging it was overcharged for royalties on chips, and that for the last 10 years Qualcomm had not passed back $1 billion in promised rebates. Qualcomm is fighting the lawsuit.

About $1.9 billion, or 8% of Qualcomm’s revenues, come from Apple.

GIS: Dependent on Apple for 75% of $2.6 billion in annual revenues, or $1.95 billion in sales.

GIS has been named as a supplier of OLED screen touch panels for iPhone 8, and it is investing $163 million into new production capacity. GIS also got the contract to make touch panels for iPad Pro.

TEXAS INSTRUMENTS: Dependent on Apple for $2 billion in annual sales, or 10-15% of its $13.4 billion in total revenue.

TI supplies Apple with four different components of the iPhone: analog and embedded chips such as display drivers, battery charger integrated circuits, power management integrated circuits for iPhone. They account for 15% of TI’s revenue, or $2 billion annually.

In 2012, Apple hired away some of TI’s engineers in Israel. The move appeared to be part of Apple’s desire to make its own custom chip designs.

BROADCOM: Dependent on Apple for up to 20% of its $13.2 billion in revenues, or $2.6 billion in sales.

Broadcom is working with Apple on a new wireless charging technology. The company has apparently been developing its system for four years. Previously, Broadcom has co-developed custom chips (ASICs) for Apple’s iPhones, iPads, MacBook Air and MacBook Pro, and iPad Pro.

MURATA MANUFACTURING: Dependent on Apple for 30% of $11.12 billion in annual revenue, or $3.4 billion in sales.

Murata is the world’s largest supplier of tiny, energy-storing ceramic capacitors, which control the flow of electricity in smartphones. It recently acquired Sharp’s battery business.

TAIWAN SEMICONDUCTOR MANUFACTURING CO: Dependent on Apple for about 15-20% of its annual revenue of about $31.3 billion, or $4 billion in sales.

TSMC supplied 100% of the semiconductors in iPhone 7 and iPhone 8, according to analysts at Morgan Stanley.

Between 15% and 20% of TSMC’s revenues come from Apple, according to various estimates. The company does about 843 billion new Taiwan dollars in total revenue annually, equivalent to about $27 billion USD. That would imply Apple provides about $4 billion of TSMC’s revenue.

Also working with TSMC is Chipbond, for driver-IC backend services. Chipbond gets about 13% of its revenues from Apple.

JABIL CIRCUIT INC: Dependent on Apple for 14% to 24% of its $18.4 billion in annual revenue, or at least $4.5 billion in sales.

Jabil makes metal casings for the iPhone. Its stock has long been used as a tracking play for Apple’s, and its results are closely watched as people try to gauge Apple sales from Jabil’s success.

JAPAN DISPLAY: Dependent on Apple for 50% of $9.1 billion in annual revenues, or $4.55 billion in sales.

Japan Display makes bendable LCD screens and also recently acquired an OLED screen maker, after aid from the Japanese government. Although it has historically had a huge chunk of Apple’s screen business it is not clear what the future holds. The rumours are that Apple is switching to OLED.

WISTRON: Dependent on Apple for 29%, or $5.9 billion, of $20.5 billion in annual revenues.

In February, Wistron won the contract to assemble the iPhone in India. Manufacturing will start with iPhone 8.

PEGATRON: Dependent on Apple for 57% of its $40 billion in annual revenues, or $22.8 billion in sales.

Pegatron, along with Foxconn, is one of Apple’s bigger and better-known iPhone assembly operations. It is based in Taiwan. It’s also the frequent target of hidden-camera investigations and criticism for how it treats its workers.

HON HAI (FOXCONN): Dependent on Apple for 46% of $148 billion in annual revenues, or about $68 billion in sales.

Everyone knows what Foxconn does, it runs the famous — and sometimes infamous — factories where Apple builds its iPhones.

Apple is currently considering a joint venture with Foxconn to buy a 20% stake in Toshiba’s chip manufacturing business.

Foxconn acquired Sharp last year. Sharp has a chunk of Apple’s OLED screen business, and Apple accounted for between 20% and 27% of Sharp’s business. According to Patently Apple, Foxconn wants to use Sharp to open up a new front as an Apple supplier:

Last year Foxconn acquired Sharp (one and two) and pushed hard to reinvent the company to quickly tool up to make OLED displays for Apple’s iPhones as one of it’s new products. In January we learned of Foxconn/Sharp’s plan to manufacture OLED displays at an iPhone plant in China. We also learned that Foxconn/Sharp was aiming to grab some of Apple’s iPhone camera lens business and that they were given the green light to test wireless charging modules for Apple’s top end iPhones for 2017. Foxconn’s Chairman also dropped the hammer on Samsung and stopped their LCD business with Samsung who was in a panic to find a replacement and eventually had to deal with their arch rival LG for LCDs. Those were just some of Foxconn’s noteworthy activities in 2016.

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